With only a few weeks to go before the holiday season, focusing on next year’s finances is probably not top of mind for most people.
However, there are a number of decisions you can make now that will improve your financial position in 2022 – as outlined in these highlights from Devon Card’s interview.
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Here’s what to consider.
1. Medical aid members have until the end of the month to change medical aid plans without penalties – what should one consider in this regard?
When choosing a medical aid plan option for next year, the first thing you need to consider is whether you or one of your dependants has had a change in health status as this will affect the benefits you need to secure for next year. Specifically, if any of you have been diagnosed with a chronic condition that requires special medication, you may want to consider moving to a plan option with a more comprehensive chronic condition benefit.
In making the assessment, take into account the cost of your monthly medication compared to the cost of the additional premium to determine whether it is financially worth your while. Depending on the nature of your condition or illness, you might consider a higher plan option that provides extra coverage for costs such as radiology, scopes, scans, and pathology.
Keep in mind that it is not possible to upgrade your plan option during the course of the year, so take time before the end of 2021 to do a careful assessment of the coverage you and your family need.
If your hospital plan indicates that it covers 100% of the medical aid tariff, keep in mind that this does not necessarily mean that all costs will be covered if you are hospitalised. This is because doctors and specialists can charge up to 600% of the medical aid tariff which means that you could end up with excessive out-of-pocket expenses. It is therefore worth considering upgrading to a hospital plan with higher coverage and/or implementing a gap cover policy that helps cover the difference between what medical service providers charge in-hospital and what is covered by your medical aid.
Optometry and dentistry are generally quite expensive benefits so if you and/or your loved ones wear spectacles or have specific dental needs then be sure to look for a plan option that has benefit coverage.
2. Would it be worth taking out a loan to pay 2022 school fees in full via a lump sum at the end of this year, to benefit from the discounts schools generally offer?
Yes, it may be worth borrowing money in order to take advantage of the discounts offered by most schools in terms of paying annual school fees upfront provided that the discount is greater than the interest you will end up paying on the loan in rand terms, not necessarily in percentage terms.
For the purposes of the example that we have used, we have assumed that your child’s school fees are R5 000 per month (or R55 000 per year) for 11 months and that the school has offered you an upfront discount of 10% if you pay in full at the beginning of the year. We have further assumed that you will borrow your money from your access bond at an interest rate of 7% per year.
After deducting your discount of R5 500, you would therefore borrow an amount of R49 500 from your access bond in January 2022 and begin repaying at a rate of R5 000 per month from month 1 until month 11, incurring cumulative interest charges of R1 638 over that period. So effectively the cost of borrowing from your bond on a reducing basis for 11 months would be R1 638. This would be the “price you pay” to enjoy the R5 500 discount, thus translating into a saving of R3 862 in school fees over the year.
It is interesting to note from these calculations that even if the school offers a discount of 5% for upfront payment, you would effectively be in a breakeven position if you were to take the discount and borrow from your access bond at 7%, simply because you would enjoy the 5% discount on the entire amount while you would be “paying” 7% interest on a reducing amount.
3. How should one undertake saving for a short-term goal for the new year, such as a holiday? Would you use a money market account, or could you invest your monthly savings until the goal is achieved?
If you’re saving towards a goal in the new year, you are looking at a maximum 12-month horizon which means that you would ideally want to keep your money in an easily accessible account such as a normal savings account, fixed deposit, or a money market account.
Remember that a money market account is not the same as a money market fund, and it is important not to confuse the two.
While a money market fund allows consumers to earn interest in a lower-risk environment than the stock market, it is still an investment as opposed to a bank account, and capital preservation is not a guarantee.
It is not advisable to expose your funds to equity markets as short-term market volatility can impact on the value of your investment depending on when you need to realise your investment, so you will want to avoid using a unit trust portfolio to save for your short-term goals.
Tax-free savings accounts, being more suited for an investment horizon of 10 years or more, are also not ideal for short-term savings as any withdrawal you make next year will impact your allowable lifetime contribution.
If you have an access bond, consider using this facility to save for your short-term goals as this is one of the most cost-effective and convenient ways of saving cash needed in the shorter term. Besides the savings on interest, there are no fees or costs involved when it comes to putting extra cash in your access bond, and accessing your money to pay for your lifestyle goal is relatively simple.